Friday, April 13, 2007

Calls of Note Part 1

Oppenheimer notes that as they had expected, Samsung was having issues moving to the next 51/52nm node constraining supply. While street estimates for Samsung's bit growth ranged from 20-40% versus their 22%, Samsung guided Q207 to low single digit 2-6% q/q bit growth. Firm believes with SanDisk (NASDAQ:SNDK) having successfully pulled in its 56nm into Feb-07 has positive implications for SNDK's Q2 bit growth and market share gains in the NAND Flash card market.

Firm believes the supply constraints from Samsung plays favorably for SNDK. Sandisk has successfully pulled in its 56nm production from Q307 into Feb-07. This provides SNDK a cost side leverage which should start flowing through the P&L 1-2 quarters ahead of Samsung. Also, Sandisk will be scrambling to gain market share in the retail market and also supplying to the handset OEMs trying to capitalize on Samsung's constraints.

Oppenheimer also notes that Samsung is almost 40% of the NAND Flash market but even a higher 70% of the supply to the Taiwanese NAND Flash card OEMs who account for 30-40% of Silicon Motion Technology's (NASDAQ:SIMO) revenues. Samsung just guided Q207 to 2-6% bit growth well below most street estimates of 20-40% bit growth. This is what they had been concerned about for SIMO, as it constrains the merchant market that it depends on. Also, given that these are product transition could easily rollover into Q3.

Firm says that While their competition has argued that 1) there was no supply issue, that definitely does not seem to be the case and 2) also that other suppliers could step in, firm believes SNDK has been very aggressive but is not supplied by SIMO's controllers. Also given that Samsung is 40% of the market, small constraints cause large ripples in the markets. Also Samsung has cut back on its own SD card production which as catalyst for one of the positive preannouncements for SIMO.

Notablecalls: I really like both of the calls. Nice work by Oppenheimer's Vijay Rakesh! I'm positive that the market will also agree. We are going to see interest in SNDK and weakness in SIMO today.